Brazil’s port push

The government of Brazil has embarked on an ambitious, multibillion-dollar port modernization and expansion program to help make the maritime system more efficient and the nation’s exports more competitive in world markets.
Brazil has the potential to become an economic power. It has a population of 200 million people and is resource rich, but it remains constrained by protectionist policies, poor labor productivity, inefficient government bureaucracy and restrictive labor regulations, high taxes, and poor infrastructure, according to experts.
The South American country invests just 2.2 percent of its Gross Domestic Product in infrastructure, compared to developing world average of 5.1 percent. (The United States is not much better – public infrastructure investment is 2.4 percent of GDP, half what it was 50 years ago, but as a mature economy the United States has already developed much of its infrastructure and now faces the challenge of rehabilitating an aging system.) Brazil ranks 70th out of 144 nations in overall infrastructure, according to the World Economic Forum’s Global Competitiveness Index, but is ranked 123, 100 and 135 in the quality of its road, railroad and port infrastructure, respectively.
Brazil is No. 65 in the world, according to the World Bank’s Logistics Performance Index, which measures efficiency of a country’s customs clearance process, quality of trade-and-transport-related infrastructure, and other factors.
Inadequate infrastructure leads to long transit times and the use of less optimal transport modes, which increases the cost of Brazil’s goods. Brazil lacks an efficient, navigable river system for moving bulk commodities from inland farming areas to its international ports. Freight railroad and highway systems are still not well developed in the interior of the country and integrated in an intermodal fashion, putting heavy reliance on trucks. And the ports are mostly too shallow and ill-equipped to handle large ocean-going vessels that increasingly are becoming the norm in international fleets.
It costs Brazilian farmers almost twice as much as their American counterparts, for example, to move a metric ton of soybeans to foreign customers because they have to truck it more than 900 miles from growing regions to ports, while American farmers can rely on cheap barge transportation to reach export terminals in Louisiana. Transportation represents 14.5 percent of a customer’s total cost to import U.S. soybeans and 23 percent of the total cost for Brazilian grain, according to U.S. agriculture industry officials.
Brazil is also a major exporter of coffee, sugar, beef, orange juice, ethanol, bauxite and iron ore.
There are 34 major public ports in Brazil located on coastal areas and rivers and 146 private terminals and shipyards. Officials forecast that cargo moving through the ports will annually grow 5.7 percent and more than double to 2.3 billion tons by 2030. An accelerated port development program is needed to meet import and export demand after years of under investment, they say.

Sources: Brazil Ministry of Ports.

Until 1989, ports were operated by the public sector, although some large enterprises like state-owned oil company Petrobas operated terminals, too. A 1993 law changed ports into landlords and mandated that all operations on their properties be run by private companies, while providing authorization for the establishment of private-use terminals to handle a shipper’s own cargo.
The partial privatization brought much more efficiency to the Brazil’s port system, but never led to significant investment in new capacity and technology because of legal restrictions and lack of competition from private terminal operators, essentially making public port operators de facto monopolies without pressure to improve service, Port Minister Antonio Pinheiro Silveira said during a public briefing on Brazil’s port policy at the U.S. Chamber of Commerce in Washington on April 4.
Last summer, the Brazilian legislature passed a port reform law, which was quickly followed by a federal decree spelling out how the government plans to implement a $26 billion, public-private modernization program to increase capacity through 2017. The port reforms, which include investments in landside infrastructure and harbor deepening, are part of a new centralized plan aimed at better coordinating intermodal freight corridors and uniting the port system with other modes of transport.
Silveira said his office is working closely with other federal and state authorities to improve freight flows. Late last year, the ports, agriculture and transport ministries announced a joint logistics plan to avoid the lines of trucks backed up as much as 31 miles on the highways trying to deliver last spring’s grain harvest following an ordinance prohibiting trucks from parking overnight at the Port of Santos.
Local port authorities traditionally have maintained operational and planning autonomy, but to reduce duplication the new law places more responsibility for coordinating investment in the Port Secretariat.
The law creates a dual regulatory framework: one for publicly operated facilities and another for those under concession to private operators.
The government is putting terminals with contracts that expire in two years and greenfield sites up for tender. The 159 concessions are divided into four auction blocks worth a combined $7.2 billion, attracting major interest from local and foreign strategic investors. Sweeteners for the 25-year contracts include a simplified bidding process, no barriers to entry and fewer regulations. The new rules eliminate any limitations on private terminals handling third-party cargo, enabling them to compete with public ports. The goal is to encourage private companies to deploy capital for redesigning and expanding terminals to create economies of scale.
Silveira has travelled to North America and Europe, and may go to Asia, to drum up interest from potential investors.
APM Terminals, which last year began to operate its newest terminal in Santos, the country’s biggest port, plans to take advantage of the government’s sale of rights to seek out additional terminals in the northeast and north of Brazil, company officials told the Financial Times.
The first round of auctions covers about 30 terminals in the strategic regions of Santos in the southeast and Pará in the north. Santos processes 10 percent of all Brazil’s cargo because of its proximity to industrial areas and large consumer markets such as of São Paulo.
Pará, which contains the ports of Vila do Conde, Santarém, Belém, Miramar and Outeiro, serves the agricultural heartland and is a gateway to Europe and North America.
The terminals are being grouped in 10 specialized lots such as liquid bulk, mineral bulk, agricultural bulk, general cargo and containers, according to a September newsletter article published by management consultant KPMG International. Concessions will cover terminals in multiple ports for each lot. Each terminal must meet performance requirements such as minimum levels of investment, productivity and minimum excess capacity.
In terminals where operators handle their own cargo, licenses will go to operators offering the highest capacity. For terminals that handle cargo from third parties, the winners will be those promising the lowest tariffs to customers, according to KPMG and government officials. That is a marked change from the previous system under which operating and development rights were sold to the highest bidder.
“This is a tremendous opportunity for incumbents and new entrants alike to gain a larger market share, especially when the expected investment of $1.3 billion from the Port Logistics
Investment Program is thrown into the mix, helping to increase capacity in Santos and Pará by around 48 million tons. Interest in the tender is expected to come from local commodity exporters, container service providers and construction companies, as well as from international port operators,” KPMG’s Mauricio Endo wrote in the newsletter piece.
The Port Santos concession will increase capacity 25 percent by reorganizing 20 small facilities into nine terminals. The investments in the Pará ports are expected to double capacity.
At the Port of Paranaguá, an important grain export facility, 17 operations will be consolidated into 10 terminals and six new docks will be built, almost doubling the port’s capacity.
Port Salvador will also see a doubling in container capacity and Port Aratu will grow its potential volume by 70 percent through terminal consolidation and the construction of a new terminal.
Paranaguá, Salvador and Aratu are scheduled to be tendered in the second round.
APM Terminals is interested in bidding on a new Amazon River port in Manaus designed to handle ocean-going vessels and in a terminal in Suapé , a company official told the Financial Times.
Since December, the Ministry of Ports has authorized 18 new private terminals, but has yet to receive a formal proposal for a multi-role landlord port, Silveira said.
The solicitation process has been delayed several times in order to complete preliminary studies required by the government. As of mid-May the government was still awaiting final permission from an administrative court to open the bid process for the first group of port installations. Technical studies have already received tentative approval, Silveira said, but regulatory signoff is necessary to prevent future legal objections.
Meanwhile, new private terminals outside public port districts must also receive authorization, but under the new rules they can handle third-party and proprietary cargo without limitation. The Port Ministry is expediting the grant process and promises to render decisions within six months.
The ministry will slowly delegate more authority back to local administrators after the initial round of investments is completed in the next year, Silveira said.
The government may consider within the next year or two privatizing two small ports, he added, although he acknowledged privatization can be controversial in Brazil. Nonetheless, there are two or three current applications for greenfield ports backed by states with private capital, he said. And Brazilian President Dilma Rousseff’s administration last year privatized two large airports and stretches of four major highways.
Decatur, Ill.-based Archer Daniels Midland Co., one of the world’s largest agriculture processing and services firms, has operated in Brazil for 25 years, during which time agricultural output has doubled.
“We think it’s equally important outside the farm gate to be competitive for agricultural products to reach the global market” and appreciate the effort to make the ports more efficient, Lorraine Hawley, a government affairs specialist for ADM, said at the U.S. Chamber event.
Speaking with reporters afterwards, Silveira said he is not worried about investing in too much port infrastructure.
“The situation in Brazil is that we have a deficit of capacity. We still need more capacity, specifically for grains and minerals. As for containers, Santos is already established. I don’t think there will be more big investments in containers in Santos because we now have capacity for five million TEUs and five big terminals. So it think it’s a in a stable situation.
“But other places in Brazil, we do need investment in containers. So right now I’m not concerned with over investment or predatory competition between ports and terminals,” he said.
The government of Brazil is also gearing up to launch a $2 billion national dredging program to deepen and maintain access to harbor channels, turning basins, anchorage areas and berths, with special emphasis on Santos and the Pará ports.
The new dredging program will be open to international competition and long-term contracts could be awarded for multiple ports, Tiago Correia, a Ports Secretariat official said. The contracts will also cover a package of services, such as maintaining aids to navigation or environmental monitoring, he added.
Silveira said the first round of dredging contracts could have terms up to four years even though the law allows contracts up to 10 years. The Ministry of Ports will award longer contracts in the second phase after ironing out any procurement challenges.
Under the first national dredging program in 2007, the average port depth was increased 26 percent, but fell short of its goals. Some dredging companies didn’t properly analyze the engineering data and specifications for risks before submitting bids and later realized they couldn’t meet requirements, Correia said.
The government is introducing the concept of performance-based contracts for the first time to ensure it gets expected results. Other protections include a more open, two-step competition process; clear clauses spelling out risk allocation, dredging goals, how to deal with cost overruns in the event of unexpected circumstances and payment conditions; and a blind reserve price bid process to prevent companies from bidding just below the target to win the contract instead of basing decisions on sound cost projections.
The Ministry of Ports has also adopted a design-bid-build approach under which it sets the goals and some operational and environmental limits and the contractor designs and executes the project, Correia said.

This article was published in the June 2014 issue of American Shipper.